Inflation has risen to its highest level in almost six years (March 2012), the latest figures from the Office for National Statistics.
The consumer prices index rose to 3.1 per cent in November, up from 3 per cent the previous month.
Inflation is principally being driven by two key factors: the oil price recovery and the continued weakness of sterling.
Brent crude increased to its highest levels in two years, jumping above $65 a barrel for the first time since 2015. At the same time, while sterling has recovered from its post-referendum lows, the currency is still weak, which in turn has pushed up import costs.
With the rate of wage growth still lagging behind inflation, the new figures represent the continued squeeze on budgets British households face. The news will be particularly unwelcome during what is for many the most expensive time of the year.
However, notes Alistair Wilson, head of retail platform strategy at Zurich, some British workers are set for a wage rise in the new year. He points out that with the recent Budget promised an above-inflation pay rise in the New Year for those on the minimum wage.
He, however, adds: ‘Higher inflation is putting further strain on family finances as we approach what is already the most expensive time of the year, and it looks set to remain above the rate of wage growth as we move into 2018.’
According to some commentators, inflation is unlikely to go much higher. As Ben Edwards, portfolio manager of the BlackRock Corporate Bond and the BlackRock Sterling Strategic Bond funds, notes: ‘This probably represents the peak in UK inflation and we expect headline prices to drift lower over 2018, all else equal.’
Ben Lord, manager of the M&G UK Inflation Linked Corporate Bond fund, agrees. He points out: ‘The good news is that the fall in sterling has probably now largely passed through to consumer prices. Providing we do not see a renewed fall in sterling, or an unexpected spike in global commodity prices, we think UK inflation may well have peaked for the time being.’
However, he warns against complacency, as ‘inflation has a habit of creeping up on us when we least expect it.’ That, notes Russ Mould of AJ Bell, ‘would be a huge surprise to investors and not necessarily a nice one.’
At the same time, notes Adrian Lowcock, investment director of Architas, despite reaching its peak, we should ‘not expect inflation to collapse’ in the near future. Savers, he says, ‘need to continue to make sure they are on the best rates available to them or consider alternatives such as investments to try and generate a real inflation beating return.’
What the latest inflation figures mean for interest rates is unclear. Edwards expects the Bank of England to adopt a ‘wait and see’ approach, owing to uncertainty surround Brexit negotiations.
One silver lining of the inflation figures is that we should soon get a clearer picture of the future direction of monetary policy. As inflation has now overshot the BoE’s target by more than one per cent, governor Mark Carney will have to write a letter to the Chancellor explaining why.
This, hopefully, will give investors further insight into the BoE’s thinking and offer some guidance on where monetary policy may be headed.
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